ASK THE EDD LAWYER – HOW TO BE PREPARED FOR AN EDD AUDIT “ENTRANCE INTERVIEW” Part 5
By Robert S. Schriebman
May 19, 2016
This is Part 5, and the final part, of a several part series of articles dealing with EDD probing questions on an initial “first impression” Entrance Interview. EDD auditors always try to conduct an entrance interview as the first phase of a worker status audit. The taxpayer-employer’s presence is required for an entrance interview. The goal of the EDD is to gather as much potentially damaging information as possible. This is why I make it a practice to avoid my client being subjected to this process.
In this series of articles I will set forth verbatim each and every interview question on the EDD’s agenda. I am sure that the EDD believes all of the questions listed in the “Entrance Interview” questionnaire are necessary, proper and relevant. Many interview questions are as the EDD perceives them to be. However, from my point of view many questions are vague and potentially dangerous to you.
It is my goal, in setting forth these questions, to give you insight and to allow you to get a “heads-up” so-to-speak. A knowledgeable taxpayer is a prepared taxpayer.
The following questions are taken verbatim from a multi-page “Entrance Interview” Matrix.
Questions Relating To The Maintenance of Books And Records
We have come to the end of the list of EDD Entrance Interview questions. The remaining questions deal with the nature and extent of the taxpayer’s books and records. These questions are important more so for the taxpayer-employer than they are for educating the EDD. Inadequate books and records are traditional “badges” of fraud. A taxpayer-employer who does not maintain a general ledger or a computerized system both payroll compliance and bookkeeping will have to produce check stubs and even fronts and backs of cancelled checks for at least 3 years or 12 payroll tax quarters. If too much of your record keeping is in cash you can expect a very thorough EDD audit as well as EDD referral to the FTB, SBE and even the IRS. Inadequate books and records often leads to an estimated EDD assessment that cannot be settled and must be taken before the CUIAB.
What kind of accounting system does the business use? Cash? Computerized?
Bob’s comment: This is a proper and relevant question. It is also found in the Pre-Audit Questionnaire.
Does the business have an outside accountant/bookkeeper for payroll and/or tax return purposes?
Bob’s comment: This is a proper and relevant question. It is also found in the Pre-Audit Questionnaire. The EDD auditor may ask you for the contact information for your accountant or bookkeeper such as, name, phone, and email address.
Who does all the accounting for the employer; including payroll?
Bob’s comment: While this appears to be essentially the same question as asked above, it is not. This question probes individuals who are responsible for payroll tax compliance.
While this question, in my opinion, is irrelevant to an EDD audit, it provides very important information to an EDD collector. If a corporation or LLC fails to pay an EDD assessment it is the collector’s job to determine individuals within the corporation or LLC who are “responsible persons” for payroll tax compliance.
If the corporation or LLC owes payroll taxes, those taxes must be given the highest priority of payment. According to both the EDD and IRS, if the business funds are limited, and the choice has to be made whether to pay rent, utilities, or back payroll taxes, the payroll taxes must be paid first.
Pursuant to CUIC § 1735 the EDD has the right to collect corporate level or LLC level delinquent payroll taxes from responsible individuals such as the CEO and CFO of the company. However, one need not be a shareholder, or officer, to be exposed to this assessment.
This Part 5 brings to a close the discussion of the many potential pitfalls that await a naïve employer especially one who thinks he or she can go it alone without professional assistance or representation. It’s too late to seek effective professional help after the “horse has left the barn,” and you have given the EDD auditor all ammunition he or she needs to issue a huge assessment.
I am reminded of the wife of a local employer who took it upon herself to answer a phone call from the EDD seeking information about a former worker who filed for UI benefits. This worker was treated as independent contractor, as was the custom in their industry. The EDD caller was very interested in why the worker was treated as independent contractor and not an employee; a typical EDD probe. After her call with the EDD, she called me seeking assurances that the information she gave the EDD was the right thing to do. It wasn’t. Her do-it-yourself call eventually lead to an EDD audit with a resulting $85,000 assessment. Eventually the case was settled for a lot less money, but it was still a very expensive call for her to respond to.
My point: It may be better to spend a little bit of money in the beginning getting professional advice than to spend a lot of money fighting the EDD.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Web Site Article 224